Yesterday turned into a fascinating day as both the Bank of England and the European Central Bank faced the same problem. They both did the same thing.
Accordingly, the Governing Council today decided to raise the three key ECB interest rates by 50 basis points and it expects to raise them further.
Although the Bank of England was more circumspect with the rhetoric. Perhaps because unlike ECB President Largarde it had remembered the words of Mario Draghi ( “We never pre commit”). Anyway the ECB backed it up with this.
In view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.
But got a response like this.
Out of all the outsized reactions to the ECB yesterday, Italian bonds take the biscuit BTPs rallied 40bps yesterday (40!) ( @CNBCJou )
That is a market saying we do not believe you! Bond markets do not have to go the same way as official interest-rates but there are two ways of looking at this. One is simply to note a rally of 3 points. The other is for the argument that ten-year yields represent a type of forecast of future interest-rates. So there is something of a 1.4% swing here as we have 0.5% up plus a promise of another 0.5% seeing a 0.4% fall. How did the words of President Lagarde get treated with such disdain?
Press Conference Confusion
President Lagarde got into trouble with the first question which is below.
I’m interested in knowing whether there were any calls to commit for longer, potentially flag a less aggressive stance, or say nothing at all, given that you also say that your decisions are data-dependent.
That was a very good question and the immediate response was this.
I would just remind you that our decision is not the decision for March.
Having now formally told us twice that March would be 0.5% that was quite the take.Then the waffleometer was fully tested before this.
Steady pace: we increased rates by 50 basis points in December, we increased rates by 50 basis points in early February, and we intend – which is a strong word; it’s not an absolute, irrevocable, unconditional commitment, but it’s a strong word – we intend to raise by 50 basis points, and that is what was meant in December by this steady pace reference that you find, yet again, in the monetary policy statement.
Quite what a “strong word” means if she does not raise by 0.5% in March will be a subject for my financial lexicon for these times. Then she inadvertently admitted the vote was not unanimous.
very, very large consensus today
Whilst the first question was rather good the second was savage.
could one potential conclusion also be that you have already reached the peak in interest rates at that time?
That was a complete dismissal of the Forward Guidance provided by President Lagarde. Suddenly the consensus hype morphed into this.
I have to tell you that there was general agreement
Then this.
Where there was discussion and not full agreement was on the way in which we communicate it.
In response to a question pointing out markets were already ignoring her we got perhaps the most extraordinary response of all.
First of all, we are data-dependent, and we know that we are getting a projection exercise at our next March meeting, but we are also data-dependent when we look at underlying inflation elements.
As I have pointed out many times you cannot pre commit and claim to be dependent on data you do not yet know. Then even for her we got something extraordinary.
This is what we are saying when we say we ‘intend’ to, which is why the word is pretty strong.
Okay so there is doubt which immediately disappeared.
Now, in Davos I did say that we shouldn’t be doubted
In fact she then seemed to be trying to set a world record for use of the word. But we were left with two situations.One is that the previously rather supine press corps seem to have enough of her rhetoric and are exposing her failings.Second financial markets are simply ignoring her.
Forecast Failures
If we now switch to the Bank of England we can now observe another issue which is that the supposedly technocratic central bankers are not very good at one of their main roles. We can start with this.
Although UK quarterly GDP growth in 2022 Q3 had been revised down to -0.3% in the Quarterly National Accounts, it was stronger than had been expected at the time of the November Monetary Policy Report
So they got the third quarter wrong quickly followed by a similar confession about the fourth.
Bank staff now expected GDP to have grown by 0.1% in 2022 Q4 as a whole, stronger than at the time of the November Report.
This matters because their doom ridden forecasts were grabbed enthusiastically by the media in their role as moths to the flame. Then we get an even bigger confession of failure and the emphasis is mine.
But this is a much shallower profile for the decline in output than in the November Report, in part reflecting a reassessment of the outlook for consumption in light of the recent strength in the labour market, as well as the decline in wholesale energy prices. Four-quarter GDP growth picks up to almost 1% by the end of the projection, although growth is expected to remain well below pre-pandemic rates.
The first table shows a fall of 1% in GDP rather than the previous 2.6% which is quite a change in only three months. At that rate of progress we will have strong growth by the time we get there! By the way I do not believe that but there is an issue in that the error was much larger than the new forecast of decline. This matters on two counts and the first is how the media presents it.
This isn’t one of the main charts in the
forecasts today but it might be one of the most important. Come 2026 the UK economy will still be smaller than it was in 2019. Another seven years of lost growth. ( @EdConwaySky )
Ed is one of the better journalists but even he has started “will” about a forecast 3 years ahead by a body which has just got not only the past 3 months wrong but the three months before that.
This particularly matters because it is the central bankers who tell us that expectations are important often suggesting they matter more than actual numbers.So ironically they should be appalled by their own forecasting failures.
Comment
There is a lot to take in here but the main point is that central banks have lost control of both the narrative and the markets. The latter must be especially galling after the Trillions they spent to gain control. Although there is an irony as their enormous bond holdings had a good day. Having spent so much time majoring on expectations and guidance this leaves them in quite a mess. But what do you expect when this happens via President Lagarde.
Inflastion is a “hump” ( it soars)
Interest-rate rises are “very unlikely” ( she now boasts about raising then)
Interest-Rates will rise by 0.5% in March ( or perhaps not)
This is how they end up after all the interest-rate rise rhetoric having to say this.
ECB’S SIMKUS: A RATE CUT THIS YEAR IS UNLIKELY, ALTHOUGH IT’S POSSIBLE IN 2024, IF THE SITUATION CHANGES. ( @financialjuice )